Evaluate your risk tolerance - The markets go up and down, sometimes rather dramatically, but over the long term they tend to go up. If the ups and downs of the current market keep you awake at night, your investment portfolio is probably too heavy in the markets. Everyone wants a great return, but a great return also means a great risk. Low risk means low returns, so you want a balance. You need some risk if you want to earn better than inflation returns. Before you invest anything a financial advisor should go over what kind of risk you are comfortable with for your investments.
Look at your time frame - If you are retiring in less than 5 years, than you should not be putting much of your portfolio at risk because you may not have enough time to recover if the markets have a bad few years. A good financial advisor will warn you of this. If you are planning to continue to invest or do business for at least 10 years then your portfolio can be in the riskier investments (with higher potential return) because it is more likely if the markets go down that your portfolio will have time to recover. By looking for returns over the next 10 or 15 years you can afford to take a little more risk today. Concentrating too much on the short term means you will be constantly anxious about what is happening. Investing is best done over the long term, not in a short burst of a couple years before retirement.
Diversify your investments portfolio - This is something your advisor should be doing with you annually. While certain industries have had a great run (technology stocks in the 90's, oil from 2002 to 2008) they also have crashed in big ways. By placing too much of your portfolio in specific industries that have good returns, you are also placing your investments at risk of a serious drop. By diversifying your portfolio you can have some money in high risk/high return areas, but also protect yourself to the downside with steady dividend stocks, bonds and term deposits.
It is natural that the older one gets the less risk they tend to take, however a lack of a proper retirement fund by many baby boomers, or having lost and not regained from the downturn in 2008, has encouraged many people to try and "catch up" by taking more risk to get better returns. Investment portfolios are not best designed to provide good 1 year returns. They work best providing solid returns over a long period of time. Don't try and take more risk to get ahead, and you shouldn't over-react by going to zero risk either as the returns are very low when risk is minimal. It is a balance of having some secure and some risk in order to earn solid returns over the long term.
This is why it is important to have an advisor help in the investment process. A third party without the emotional involvement will provide an objective, more realistic opinion than you have when you are feeling a lot of anxiety. Decisions should rarely be made in an emotional state, whether in distress or exuberance, we tend to emphasize too much of the good or the bad and not make a rational decision. Help can avoid those types of emotional decisions.
If your investments have been done correctly for your risk level and your time frame, whether the markets go up or down should not really influence you too much during the chaos of this past week. The above advice is the same as the advice I would give during calmer times.
I guess we're learning about risking too much of our nest egg all over again. Shades of 2008 and 2001. You would think I would learn not to make the same mistakes 3 times in 10 years. I guess I will be looking for a finanical planner.
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